"The companies will come under the grip of Iraqi law, will be monitored by the interior ministry and will work under its guidelines," he said.

"They will be strictly punished for any [violations] on the street."

Blackwater is the biggest private security firm operating in Iraq, with contracts including protecting the US embassy in Iraq and its diplomatic staff.

Tens of thousands of often heavily-armed security contractors work in the country.

Correspondents say their behaviour has incensed Iraqis who view them as private armies acting with impunity on their soil.

The contractors are currently granted immunity from prosecution under Iraqi law by Order 17 of the Coalition Provisional Authority - the now-defunct interim body set up by the US-led coalition in the wake of the fall of Saddam Hussein.

The agreement was extended shortly before the CPA was disbanded in June 2004.

Last week, Prime Minister Nouri Maliki called for the US government to end its contract with Blackwater immediately, although on Monday he agreed they should await the findings of the probe.